First US – Japan Summit Meeting Passes Succesfully

Feb 15, 6:24 pm
Japan's economic data

FX Policy Discussion Separated From Monetary & Trade Policy

The first summit meeting between Donald Trump and Japanese President Abe ended in an amicable manner with no disputes arising between the two leaders. The Japanese achieved success in separating FX policy discussion from monetary and trade policies. Both sides agreed to start a new high-level dialogue on economic policy led by VP Pence and Deputy PM Aso. The three core areas of discussion will be 1) trade policy 2) co-operation in infrastructure, energy, cyberspace; and finally 3) macro policy coordination (fiscal and monetary). Discussions on FX policy will be held separately by the Treasury secretary and finance minister.

Japanese policymakers have been adamant in arguing that Japanese macro policy isn’t intended to weaken JPY and that the BOJ’s monetary easing is necessary to achieve the inflation target. Policymakers also argue that Japan has not intervened in FX markets since 2011. However, this  is still a lingering concern among Japanese policymakers that the US could criticise the BOJ, claiming that their monetary easing is a tool for weakening JPY. It is precisely this concern that is likely responsible for driving speculation for higher Japanese yields recently.

Japan & US Agree on High-Level Dialogue

Although the high-level dialogue between the two nations is expected to include cooperation on macro policy, including monetary policy, discussions might not include FX policy which is due to be discussed at a different place.  Furthermore, the joint statement, which was released after the press conference, stated that “the President and the Prime Minister reaffirmed their commitments to using the three-pronged approach of mutually-reinforcing fiscal, monetary, and structural policies to strengthen domestic and global economic demand”.

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Donald Trump and Japanese President Shinzo Abe

It was reported over the weekend that a Japanese Ministry of Finance official said that the US and Japan confirmed a commitment to continued monetary policy accommodation as part of PM Abe’s “three-arrow” economic program.  This should prove enough to assuage some of the market’s concerns regarding the US’s criticism of Japanese monetary policy and therefore, increase the market’s confidence in the efficacy of the BOJ’s current policy framework.

Will Dialogue Lead To Free Trade Agreement?

What will be interesting to monitor with this high-level dialogue on economic policy is whether it becomes a discussion on a bilateral free trade agreement, in the context of President Trump leaving the Trans-Pacific Partnership. Japan was concerned ahead of the meetings that FX policy as well as trade policy, would be included on the agenda. However, this wasn’t the case and again, should alleviate the concerns of Japanese investors.

VP Pence’s Attendance A Positive Sign

A further positive development is that fact that VP Pence was in attendance for the meeting. The VP is a former governor of Indiana, a state which Japanese carmakers have invested heavily in. Therefore, it is likely that Japan will drive the argument that Japanese investment into the US has created jobs there.

VP Pence should appreciate this which will work in favour Japan in future of negotiations. Cooperation in infrastructure and energy was stated as one of the three areas in which Japan can offer investment in the US and purchases of more US energy. This should help alleviated US pressure on Japanese trade and macro policy.

FX Policy To Remain High Priority

Notably, when asked about Chinese FX policy during the conference, President Trump commented that he has a history of complaining about currency manipulation. These comments encourage the view that FX policy is likely to remain a high priority for the Trump administration.

With FX policy discussions having now been delegated to the Treasury secretary and the finance minister, the upcoming G20 finance ministers meeting on 18-19 March, will be very important. For currency traders, the key focus will be on whether there are any significant changes to commitments on monetary and FX policy. For now, reduced concern over US criticism of Japanese FX policy is likely to provide support for USDJPY.

Technical Perspective

Price held the test of support at the 111.53 area and is now en route back up to test the 115.60 level resistance. Above there, the bearish trend line from June 2015 highs will be the next key level to challenge.

 

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With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.